What Every Investor Must Know About Fracking

What role does social responsibility play in your portfolio? Is your historical return what matters most, or do you refuse to invest in anything -- even if it might be wildly profitable -- if it harms the environment?

I can't answer that question myself, but a good rule of thumb is this: If thoughts about your investments -- whether from a financial, environmental, or any other type of perspective -- keep you up at night, you should examine the situation further.

Recently, I found myself losing some sleep about an article I wrote touting the promise of natural gas. A number of commenters (and my wife) were upset that I'd support an industry that relies so heavily on hydraulic fracturing, or "fracking."

That led me to do my own research on the topic. While it can be difficult to get straight, unbiased answers from anyone on the matter, I've highlighted the four biggest things I think every amateur investor needs to know about the process.

1.The difference between fracking now and what fracking used to beMany supporters of fracking are quick to point out that the process has been around for over 60 years. And while that's true, without any context this fact can be wildly misleading. Take a look at some of the key differences between what fracking looks like today versus its role in the past.

Fracking in the Past

Fracking Today

Use and frequency

Last ditch effort to squeeze oil out of wells

Primary method used to extract natural gas

Type of Drilling

Vertical

Vertical and horizontal

Water Use

Unknown, but far less than now

4.5 million gallons per well

Pressure

Less than 10,000 psi

13,500 psi

Source: Chesapeake information page, Affirming Gasland.

If some of this is confusing to you, that's okay. The big takeaway is that if someone claims, "They've been doing it for years and it hasn't caused any harm," they're whitewashing the changes that have occurred over the years.

2. The 2005 change to the Safe Water Drinking ActAlthough about 98% of the solution used to fracture the shale and release the gas is a combination of water and sand, the other 2% has been a source of great concern. Opponents fear that carcinogenic chemicals -- as well as natural gas itself -- could find its way into drinking water.

In 1974, the Safe Water Drinking Act was signed into law to protect the public's supply of potable water. As part of the program, the EPA was required to regulate any liquids being injected into wells. However, in 2005, Congress amended the act to exclude fracking from regulation.

Essentially, natural gas companies can claim that their solutions are "proprietary" and, therefore, trade secrets. Some companies -- like Chesapeake (NYS: CHK) -- list the basics of what's in their fracking solutions on their websites. But without third-party verification, there's no way to test these claims.

3. A lack of certainty in causationIn the documentary Gasland, several residents of Weld County Colorado claimed fracking contaminated their water. When Colorado authorities investigated the situation, they found that in only one instance was this the case.

The key to this decision was the fact that authorities were measuring two different kinds of methane. Biogenic methane is naturally occurring. Thermogenic methane, on the other hand, is the type that's more commonly believed to be the result of drilling. When only biogenic methane is found, authorities consider it to be a result of natural processes. But when thermogenic methane is found in water, then gas companies are usually on the hook.

But the situation may be a bit more complicated than that. Opponents of fracking claim that though the biogenic methane is naturally occurring, the fissures caused in the fracking process accelerate its seepage into the water supply. As of yet, there's no conclusive way to test the veracity of such claims.

4. Danger in all forms of energy extractionIf you're looking for a 100% foolproof way to use energy without harmful consequences, you are going to be searching for a long time.

There have always been, and will always be, dangers associated with harvested energy.

Cause for Concern

Coal

Pollution of air, ground, water

Oil

Massive oil-spills and air pollution

Natural Gas

Contamination of water supply

Bio-Fuels

Ballooning costs of corn, switchgrass or other feedstocks

Nuclear

Meltdowns and radioactive waste

Solar

Energy-intensive production of solar cells

Wind

Negative ecological and aesthetic effect based on turbine size

Hydro-Electric

Fundamental changes in ecosystems of waterways

What's a Fool to do?My point is not that we're all doomed and that we should resign ourselves to environmental degradation. Nor is it that we should discontinue all alternative energy exploration because of possible negative side effects. Like just about everything in life, the answer lies in the middle.

Before making sweeping conclusions about the long-term viability of natural gas, we simply need more information. The biggest problem standing in the way of that is that exception granted to fracking companies by the 2005 amendment made to the Safe Water Drinking Act. If this were repealed, the EPA could quickly gather crucial data needed to determine how we should approach natural-gas extraction.

Clearly, there are serious questions that need to be answered. They effect shareholders in not only large natural-gas producers like EnCana (NYS: ECA) and Chesapeake, but also smaller producers like SandRidge Energy (NYS: SD) , as well as periphery plays like Westport Innovations (NAS: WPRT) , which designs natural-gas engines, and Clean Energy Fuels (NAS: CLNE) , which is building out natural-gas filling stations.

If you'd like to find out which of these companies could benefit the most from a natural-gas conversion, I encourage you to check out our latest special free report. Inside, you'll see why this small company could offer huge returns to investors who get in early. Get your copy of the report today, absolutely free!